Caution optimism and Nigeria’s economy

The Central Bank of Nigeria (CBN), at its last Monetary Policy Committee meeting, retained all rates for a period of 16 months, since July 2016 when it adjusted it upwards from 13 per cent to 14 per cent.

The move was more of a “single dose” approach to multiple challenges facing an economy soon to be declared recessed then, after CBN admitted that it has used all monetary policy tools in his possession.

Indeed, the decision was targeted at the then rising inflation, speculative attacks on the naira at the foreign exchange market and an incentive to foreign investors, who would be attracted to government’s risk free securities- bonds and treasury bills. This helped to attract the much-needed foreign currencies that were in short supply with oil price crisis.

Now there is really a reason to believe that the decisions were right. The just released Manufacturing Index showed that the sector, in the month of November 2017, expanded for the eight consecutive months, with 12 of its 16 sub-sectors reporting growth.

Since this year, the country’s headline inflation that reached a high of 19 per cent has been on the decline and currently stays below 16 per cent, with other economic fundamentals returning.

So far, there is a seeming foreign exchange rates convergence, improving capital inflows, steady oil prices and growth in reserves, yet, the policy makers are bent on retaining rates. This is in consideration of the downside risks of assessed premature action, that would bring backlash through increased demand for imports and negative feedback on current account balance; and increased pressure on exchange rate and consumer prices.

A Research Analyst at Cyprus-based FXTM, Lukman Otunuga, agreed that the nation’s economic landscape has continued on recovery path although fragile.

“I believe that Nigeria’s improving economic landscape, and signs of inflationary pressures easing, are likely to support investor expectations of a rate cut. With inflation in Nigeria at 15.91 per cent, there is a suspicion that the CBN may be waiting for a more sustained decline before moving ahead with rate cuts to support economic growth.

“As the year slowly comes to an end, investors will continue to observe Nigeria’s hard economic data and inflation figures for hints as to when the CBN might act in 2018,” he said.

To him, the fragile outlook of the return remains the bases for CBN’s hesitation to take action quickly, particularly the interest rate cut calls.

Although CBN Governor, Godwin Emefiele, had recently acknowledged a justification for easing, he also reiterated that it would only be at the right time, warning that now is not the “time to take chances.”

For one thing, there is still potential adverse external developments in the form of policy decisions by developed economies and oil prices, while the cautious lending and financial intermediation by commercial banks raise issues locally.

He said that while loosening the rates would strengthen stimulate consumptions through reduced cost of borrowing, it could also aggravate the fragile consumer prices and generate exchange rate pressures, noting that the country’s output and inflation at present require effective and close monitoring to gain clarity on the optimal path of monetary policy direction in the medium term.

“Overall, the economy has begun to show strong signs of recovery as public investment has picked up with increased housing construction at the Federal and state levels, as well as shipping activities at the ports. However, policy makers must not relent in their aggressive initiatives aimed at continuing the positive growth trajectory,” he said.

While admitting that there is a positive outlook for the economy till first quarter of 2018, the bank chief said that much is predicated on continued implementation of the 2017 budget into early 2018, anticipated improvements in government revenue from the Voluntary Asset and Income Declaration Scheme (VAIDS), as well as favourable crude oil prices.

Finance Minister, Kemi Adeosun

Last month, the country’s growth report by the National Bureau of Statistics (NBS), expectedly showed an expansion in the economy for the second consecutive quarter. The growth figure at 1.4 per cent was below Bloomberg Consensus and Afrinvest Research projections of 1.5 per cent and 2.7 per cent respectively.
For analysts at Afrinvest Securities Limited, the underlying acceleration in the growth was continued expansion in oil sector, which grew 25.9 per cent year-on-year to offset the 0.8 per cent contraction in non-oil sector.

The oil sector expanded for the second time this year, gaining momentum from a soft 3.5 per cent year-on-year expansion in the second quarter, due to improvement in oil production volume to two million barrels per day (mbpd) from a low base of 1.6 mbpd in third quarter of 2016.

This was unsurprising given the decline in frequency of militants’ attacks on oil installations in the Niger Delta in recent times, following the FGN’s engagements with political and ethnic leaders in the region.

But non-oil sector remains a pressure-point, as it relapsed into negative growth after showing positive signs in Q1 and Q2. The disappointing performance of the non-oil sector and international price of crude oil from basis for the cautious approach of the monetary authorities.

In the growth report, the generally disappointing Manufacturing and Services sectors’ growth casts a shadow on an otherwise robust oil and agricultural sectors performance. The development emphasises the need for structural reforms to boost non-oil productivity and compliment the cyclical tailwind in the oil sector.

The President of the Chartered Institute of Bankers of Nigeria (CIBN), Prof. Segun Ajibola, has said that while the new growth figure is reassuring, we must also be sure of the sources of the growth.

According to him, it would be shortsightedness to celebrate just the numbers when they were not realised by deliberate policies and actions of the government.

“So, we must scrutinize the data. If the growth is fueled by oil and not non-oil sector, we are still at the same place and it is something to be cautious about.

“The oil market is a place where we have no control over and non-oil sector is a symbol of our policies and action. Before we celebrate, let us disaggregate the sectors that make up the economy. Right now, I do not feel it is non-oil sector led, so we must continue to work,” he said.

For the Lagos-based economist, Bismarck Rewane, the growth is better than the earlier numbers, but would not say it is a great feat for the country or not, as the battle for the return of the economy’s fundamentals remain huge.